Yen over-reaction

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These are nervous times on the stock market, as shown by yesterday's plunge in the Hang Seng Index to a three-year low. With Tung Chee-hwa admitting the economic downturn is likely to be 'prolonged and painful' it is scarcely surprising that the financial community should be so jittery.

This explains the market's over-reaction to the public recognition by People's Bank of China governor Dai Xianglong of the problems the falling Japanese yen presents for the mainland economy. What Mr Dai said was only commonsense: indeed it would be far more alarming if Beijing had failed to recognise the dangers posed by Tokyo's continuing woes.

Taken together with yesterday's comments in a similar vein by Foreign Trade Minister Shi Guangsheng, it shows the mainland is well aware of the need to confront the challenges presented by the falling yen. That should be cause for optimism. Instead the market seems intent on punishing such a display of openness, almost as if some brokers would prefer Beijing to revert to its secretive ways of the past.

Even the pessimists who persist in believing a yuan devaluation is inevitable, despite all the evidence to the contrary, admit that it will not occur for at least another 18 months. Given the fast pace at which economic events move in Asia, that is so far into the future as to be almost meaningless as far as the present situation is concerned. After all, who would have predicted 18 months ago that Hong Kong would now be facing such a severe downturn? If anything, the outlook for the mainland economy is better than it was a few days ago. Industrial output and money supply have started to show tentative signs of recovery, which may suggest Beijing's financial stimulus package is beginning to work. That is not to belittle the substantial problems which lie ahead: especially if the yen remains in free fall.

But at least the mainland's new generation of market-savvy technocrats have shown they are fully prepared for these. Jittery brokers may use this as an excuse for a panicky sell-off. But that only indicates the knee-jerk nature of the way in which they operate.